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Charity banking: should we just close our eyes and hope for the best?

Finance | Peter Mitchell | 3 Nov 2011

The banks are still in crisis, and it doesn't look set to change any time soon. How should your charity respond? Peter Mitchell, CAF Bank CEO, offers his advice.

Recently it seems that not a day goes by without reports of banks across Europe facing trouble, being bailed out by their governments, or downgraded by the credit rating agencies. The most recent high-profile move has been by France and Belgium to shore up local banker Dexia, but there’s been much media chatter since then about the relative stability of other banks across Europe too.

But with governments now facing questions around the creditworthiness of nations themselves, more and more economists are now questioning whether state intervention by propping up banks will even help in the long run.

Certainly the 78 per cent of RBS and 43 per cent of Lloyds that the taxpayer currently owns is worth far less than we originally paid owing to market reactions to the increasingly complex and interconnected economic world of the last few years - a world exemplified by the impacts of the sovereign debt crisis currently reverberating through the Eurozone. 

For charity managers and trustees this all adds up to a climate of uncertainty – it’s difficult to know what to do, where to turn and what decisions should be made.  What’s the best policy to take with banks seemingly at the mercy of uncontrollable and unpredictable moves in the market? Most importantly, where is the safest place for your charity’s money?

Icelandic losers

With the banking crisis of 2008, many charities lost their savings when the Icelandic banks failed.  Individual savers, companies and also charity managers and trustees were seeking out the best rates possible but had no conception of what was about to befall the world’s banking system.  Although many charities have now either recovered or have a promise to recover their funds, the original Financial Services Compensation Scheme only covered smaller organisations up to a maximum of £35,000.

Today, this limit has been lifted to a pan-European level of £85,000 (€100,000) for qualifying organisations. This will mean that most small and medium-sized charities will qualify to have their funds protected to a greater degree in future should a bank fail. But what about those with more funds in savings? The honest truth is that many of them will probably not be qualifying organisations anyway, as they will be too large to meet the deposit protection scheme criteria.

If I were a trustee of a large charity today I would probably seek to spread my cash deposits where possible.  However, if I worked with one of the household-name charities then even this might not be an option open to me. In this instance it is, in all likelihood, a case of seeking to hold funds with a combination of the highest-rated, strongest-capitalised and most prudently-run banks that can be, and given the challenges to banks posed by the deteriorating financial standing of an ever-increasing family of nation states, hope for the best!

Almost impossible to find a safe haven

While many might seem surprised at the loose language just used, the fact of the matter is that in an age where the financial profligacy of some nation states can threaten the stability of many others, there is very little to be done to find a truly safe haven. The banking crisis and economic turbulence of recent years has meant that banks we once thought of as completely safe and secure are only a country default or rogue trader away from facing a very challenging time!

The government continues to talk tough with the banks, claiming that no bank is now too big to fail. However, while this may well be an ‘end goal’, with the UK taxpayer in for so much in our intertwined banking system, I have to ask, is this really likely today? Would the government really let so many large banking institutions go to the wall and the investment of public money, already committed, become worthless?

Let’s put it this way, if we truly think that major banks are to be allowed to disappear as things stand today, then perhaps we should be more worried about the validity of our entire economic system. There is very little a trustee or finance director of a charity can do to predict such a nightmare scenario. In the face of continuing uncertainty, I think the best course of action for charities is to continue to approach their banking strategy with a mixture of both common sense and a clear head - something that we should all hope the political establishment will also maintain.

Peter Mitchell is chief executive of CAF Bank
 

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